The U.S. Economy Will ‘Grow’ 3 Percent By July As New Way Of Looking At GDP Goes Into Effect

The research and development costs that went into making the F-35 Lightning II Joint Strike Fighter will soon be considered part of the gross domestic product estimate for the U.S. Previously such expenses were considered development costs by the producers of the jet and were not taken into account as part of the U.S. economy.
Reuters

The U.S. economy will be 3 percent larger by July, at least on paper.

Not since computer software was added to the mix of U.S.-made goods in 1999 has the federal government embarked on a major change to the way the country’s gross domestic product is calculated.

By this summer, the U.S. Bureau of Economic Analysis (BEA) will have completed a massive revision of current and historical data, adding billions of dollars worth of non-manufactured items, including royalties from movies, TV, books and music, as well as money spent on research and development. The U.S. will become the first country to take these so-called intangible assets into account.

The changes will also require economists to re-visit past studies based on the country’s economic growth based on the traditional way GDP has been weighted.

The adjustment will add 3 percent to the country’s GDP; that’s roughly 468 billion based on last year’s GDP estimate of $15.6 trillion. Two thirds of this will come from the new way of looking at R&D, which has traditionally been viewed as a cost of doing business rather than an investment.

For example, the cost of developing a new weapons system by a defense manufacturer will now be considered part of the country’s economic output rather than just a corporate expense. Under the new paradigm, states with large amounts of defense-related R&D will see their GDP estimates grow considerably. New Mexico, for example, will see its GDP estimate shoot up 10 percent thanks to the considerable presence of military research going on there.

California will also see significant changes considering its film industry and all the tech-related research and development by companies like Cupertino-based Apple Inc. (Nasdaq:AAPL). Royalties from creative works will add 0.5 percent to the country’s GDP under the adjustment, which will be made back to 1929 in order to maintain the integrity of comparisons to past GDP data.